Thursday, January 24, 2008

(12:20 PM) | Adam Kotsko:

Fiscal Policy

The excellent new-ish blog Scanner has a post proposing that any bail-out of bond insurers be accompanied by a requirement that their employees pay higher taxes. I am in favor of any proposal to tax the rich, and so I of course think it is a great idea.

This proposal prompts a broader reflection. Obviously capitalists resent taxes, and after they have spent sufficient amounts of money to screw over their workers, they will devote any remaining political donations to getting tax cuts. Often this is a "two-fer," given the commitments of the Republican party. The paradoxical thing, however, is that screwing workers and reducing taxes, while good in the short term for particular capitalists, is actually bad for the capitalist class as a whole.

Capitalists in aggregate need workers to push back against them for higher wages, so that the workers can in turn spend that money and create real economic growth. They also need the government to forcibly take away a certain amount of their money in order to invest in infrastructure and other non-profitable enterprises that are nonetheless necessary for capital accumulation in aggregate. Individual capitalists are necessarily ideologically opposed to both of these things, yet by opposing them, they shoot themselves in the foot.

A really clear example of this is health care and pensions. In the post-war period, capitalists should've handed responsibility for both over to the federal government, because it makes no economic sense for an individual business to take on an indefinite and constantly-growing liability when they have no idea whether they'll be able to pay it off -- i.e., whether there will be enough workers in the future to pay into the system. It is a much safer bet that the US economy as a whole will be able to have enough workers to pay into the system than that GM alone will. They didn't take this route, because setting up individual healthcare and pension plans gave them greater control over their workers in the short term. And now look at how well that has worked out for GM, for example. (There was a great New Yorker article about this several years ago, and I have no idea how to go about finding it.)

More broadly, however, since infrastructure and social welfare are inherently non-profitable, if capital is not forcibly seized by the government, no capitalist will undertake such projects, at least not in the long run. Yet since they are necessary to growth, the lack of such things will undercut capital accumulation in the long term because the nominal wealth of the capitalists will not correspond to any real economic growth.

The result is speculation, where large amounts of money are shifted around dramatically, with no real economic basis for the existence of said money. That is, the amounts of capital that are being destroyed right now are amounts that, by rights, should not exist anyway, because they do not correspond to any real value -- but because the US has so undercut the actual engines of sustainable economic growth, this fictitious capital is the only leverage we have in the world economy. Hence the Fed is, in a certain sense, correct to abuse its power in orer to prop up market prices. As bad as things are for the working class (which includes most of what we call the "middle class") currently, they would be even worse if this illusion were dispelled -- and as things stand, the likely result of a major economic collapse looks a lot more like Weimar Germany than another New Deal.[*]

In short, what we are seeing right now is the clearest possible vindication of the labor theory of value.

[*] The fear that Islamic countries will be taken over by fundamentalists if the present elites fall and democracy is installed is perhaps a projection -- if our ruling class collapsed, religious leaders would be the only ones to fill in the gap, at least in large portions of the country. By contrast, there's no real indication that the people of Pakistan, for instance, long for theocracy.